OTTAWA (Reuters) – The Bank of Canada issued a more upbeat outlook for the Canadian and global economies on Thursday, suggesting that an interest rate hike may be back on its radar screen, albeit not immediately.

The central bank maintained its overnight lending rate target at 1 percent, mirroring decisions by the European Central Bank and the Bank of England and extending its freeze on borrowing costs for an 18th month.

In a statement, it said the Canadian economic outlook was “marginally improved”, uncertainty around the global economy had decreased and the profile for inflation was somewhat firmer than it had foreseen.

It also warned about the dangers of high household debt levels in a sign of increasing worry about Canadians taking on too much mortgage debt at ultra-low rates. Canada’s housing market has been strong, prompting some talk of a housing bubble or a price correction of some sort.

“Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk,” the bank said.

The Canadian dollar firmed to C$0.9925 versus the U.S. dollar, or $1.0076, immediately after the announcement, up from C$0.9955, or $1.0045, going into the statement.

The more hawkish language sent short-term bond yields higher as traders priced in the possibility the central bank will tighten policy sooner than previously thought. The yield on the two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate expectations, rose to 1.154 percent from 1.139 percent just before the release.

Yields on overnight index swaps showed traders had all but ruled out the prospect of rate cuts this year, whereas they had been pricing in a rate cut for the past few months.

That now looks unlikely, given that the bank says it sees “tentative signs” of stabilization in the European debt crisis, a modest U.S. expansion and high commodity prices.

RATE HIKES ‘NOT A 2012 STORY’

But analysts still do not expect Canada to raise rates too far ahead of the U.S. Federal Reserve, given that higher Canadian interest rates could drive up the Canadian dollar.

“It shows a little bit more of a hawkish bent. It’s not enough to change their official bias,” said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.

The bank said there is “considerable monetary policy stimulus” in Canada, but it made no mention of the need to withdraw that stimulus eventually, as it did in May and July of last year.

Tempering its optimism was the fact that temporary factors will be behind the likelihood of stronger than expected annualized growth for the first quarter. Exports will contribute little to growth despite stronger U.S. demand, because of the persistent strength of the Canadian dollar and competitiveness challenges, it added.

Camilla Sutton, chief currency strategist at Scotia Capital, called the statement “less dovish” and said the Bank of Canada looks set to tighten policy slightly ahead of schedule. “But that’s still a 2013 story. It’s not a 2012 story,” she added.

Analysts surveyed by Reuters last month expected the Bank of Canada to keep rates on hold until the second quarter of 2013.

The bank said the outlook for total inflation and core inflation looked firmer than it had predicted in January.

“After moderating in the second quarter, total inflation is expected, along with core inflation, to be around 2 percent over the forecast horizon, reflecting the combination of modest growth of labor compensation, an economy operating around its potential over time, and well-anchored inflation expectations,” it said.

Bank of Canada Governor Mark Carney has signaled that the inflation target is “flexible”, meaning he could refrain from rate increases even after inflation returns to its 2 percent target and the economy returns to full capacity.

The Bank of Canada meets again on April 17.

Lawrence Kobescak

Lawrence is a mortgage agent with Trillium Mortgage, a real estate investor, finance writer and creator of OntarioMortgageSuperstore.com. OntarioMortgageSuperstore.com has reached over 125,000 Canadians since 2009. OntarioMortgageSuperstore.com assists Ontario residents obtain bad credit mortgage financing, second mortgages and helps all home owners obtain the best mortgage rates. In his free time, Lawrence assists other real estate professionals across Canada by providing real estate search engine optimization services.

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By Vernon Clement Jones

A new poll suggests economists are increasingly convinced the government will move to ratchet down mortgage rules in 2012 – that even as the broker channel ramps up lobbying efforts to block the move.

Some 10 of 14 economists and strategists surveyed for Reuter’s first poll on the Canadian housing sector last week said Ottawa does, indeed, seem poised to tighten mortgage rules within the next 12 months.

Moreover, they believe that intervention is likely to come as early as the busy spring season.

That opinion may be reflected in their projections for home prices this year, with respondents predicting a mere 0.1 percent climb for this year and again in 2013. That’s down from last year’s near-1 per cent price growth.

The poll results may only add to broker concerns that the federal government is planning to reduce the maximum amortization for CMHC-insured mortgages to 25 years instead of the current 30.

Brokers are already concerned that the CMHC has effectively moved to discourage lenders from growing their business-for-self portfolios.

Earlier this month, the Crown corporation warned lenders they’ll face increasingly limited access to bulk insurance for their conventional loans as the CMHC’s $600 billion fund comes within 10 per cent of its government-set ceiling. At the same time, documents from the Office of the Superintendent of Financial Institutions revealed the regulator’s concerns over mortgage lending for self-employeds and lender underwriting standards on those loans.

Economists polled by Reuters are suggesting more formal rule changes are in the works. Industry analysts are betting on that chop in the amortization cap and/or an increase in the cost of mortgage insurance.

CAAMP is now actively lobbying against any such move, with its CEO twice travelling to Ottawa this month to deliver that message to Finance committee members in person.

It has also crafted a new industry report documenting what could well be at stake with further tightening of the country’s mortgage rules — detailing the economic impact of the housing and mortgage industry.

“We want the government to be aware of the economic and job contribution that housing and the real estate industry provide,” said CAAMP CEO Jim Murphy, coming off a second visit to Parliament Hill. ”CAAMP, based on current data and research, sees no need to further tighten or restrict access to residential mortgages at this time.”

The new report by CAAMP Chief Economist Will Dunning is bringing that point home by identifying all the ways that the Canadian housing sector is a significant economic driver.

Housing and mortgage activities, along, “could account for more than 1.35 million direct and indirect jobs about 8 per cent of total Canadian employment,” writes Dunning. “The housing and mortgage industry has been particularly important to job creation these past five years.”

The report estimates that from 2006 to 2011, 18 per cent of all job creation occurred as a direct and indirect result of growth in the housing and mortgage sector.

Lawrence Kobescak

Lawrence is a mortgage agent with Trillium Mortgage, a real estate investor, finance writer and creator of OntarioMortgageSuperstore.com. OntarioMortgageSuperstore.com has reached over 125,000 Canadians since 2009. OntarioMortgageSuperstore.com assists Ontario residents obtain bad credit mortgage financing, second mortgages and helps all home owners obtain the best mortgage rates. In his free time, Lawrence assists other real estate professionals across Canada by providing real estate search engine optimization services.

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Greg Quinn (Bloomberg) – Jan 17, 2012 10:31 AM ET

The Bank of Canada kept its main interest rate unchanged for an 11th consecutive meeting and said economic growth will be “more modest” amid a weaker outlook for the U.S. and Europe.

The Ottawa-based central bank left the target for overnight loans between commercial banks at 1 percent, where it has been since September 2010, as forecast by all 26 economists surveyed by Bloomberg News.

The rate pause is the longest since the central bank adopted the overnight target as its policy rate in 1994, and longer than the “conditional commitment” to hold it at 0.25 percent that lasted from April 2009 to June 2010. European governments are struggling to manage a fiscal crisis and U.S. growth will also be hampered by the need to pare debts, the Bank of Canada said today.

“While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment,” policy makers led by Governor Mark Carney, 46, said in a statement. “There is considerable monetary policy stimulus in Canada,” the central bank said, echoing its previous decision.

Slower Growth Ahead

Canadian bonds trimmed losses after the announcement with yields, which move inversely to prices, declining. The benchmark 2-year government bond, which saw its yield rise as high as 0.982 percent, was almost unchanged from yesterday at 0.965 at 10:15 a.m. in Toronto. The six-month overnight index swap rate, which measures what investors think the bank’s policy rate will average over that time, was little changed at 0.965 percent.

Canada’s economy, the world’s 10th largest, will expand 2 percent this year and 2.8 percent next year, compared with an October forecast for expansions of 1.9 percent and 2.9 percent, the bank said. The estimate of 2011 growth was increased to 2.4 percent from 2.1 percent.

“A lot of the things that pulled Canada out of the recession quickly can’t continue to lead the way, and now we need help from the rest of the world,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.

Carney, who was named chairman of the Financial Stability Board in November, will hold a press conference tomorrow after releasing a detailed forecast in a Monetary Policy Report.

The European Central Bank, Norway and Australia cut interest rates last month to stem the damage from slowing global growth.

‘Rates On Hold’

“The bias is still just to keep rates on hold for the foreseeable future,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto “As long as these external headwinds persist the bank doesn’t have any incentive to take rates higher.”

European leaders have spent two years working to stem their crisis. Standard & Poor’s reduced the credit ratings for nine of 17 European countries including France, Italy and Spain on Jan. 13.

“The Bank continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks,” the Bank of Canada said. “The Bank expects the U.S. recovery will proceed at a more modest pace going forward, owing to ongoing household deleveraging, fiscal consolidation and the spillovers from Europe.”

Inflation Above Target

Carney’s interest-rate freeze comes even as inflation exceeds his 2 percent target. Consumer prices rose 2.9 percent in November from a year earlier, Statistics Canada said Dec. 20. The average monthly gain in consumer prices through November was 3 percent, on pace for the highest average pace since Canada adopted inflation targets two decades ago.

The central bank predicted in October inflation will slow to 1 percent by the middle of this year. Today, the bank said that the economy will return to full output and the pace of price increases will accelerate back to its 2 percent target in the third quarter of 2013, one quarter earlier than it had forecast.

Some Canadian executives also say that the recovery may be curbed by events abroad, including the U.S., which buys three- quarters of Canada’s exports. RealtyTrac Inc., an Irvine, California-based data vendor, said Jan. 12 that banks may seize more than 1 million U.S. homes this year, a 25 percent increase.

Not ‘Immune’

Canada’s consumers have been steady, Rogers Communications Inc. Chief Executive Officer Nadir Mohamed said on a conference call last month, adding “we’re not going to be immune to what’s happening in the rest of the world, Europe and the U.S.”

The Canadian dollar’s “persistent strength” also remains a challenge to exporters, the central bank said again today.

The Canadian dollar hung onto gains after the announcement. The currency was trading at C$1.0149 per U.S. dollar at 10:15 a.m., from c$1.0179 yesterday. One Canadian dollar buys 98.53 cents.

Finance Minister Jim Flaherty, who has ended a two-year government stimulus program, said last week he will consider new initiatives if there is new major slowdown. On Nov. 8, Flaherty pushed back his target for eliminating Canada’s deficit by a year to 2015 because slower growth will erode revenue.

The Bank of Canada today also reiterated that household debt will keep rising to records, after reaching 153 percent of disposable income in the third quarter. The bank said last month consumer debt is the main domestic risk to financial stability.

The next Bank of Canada rate meeting is scheduled for March 8th 2012

Lawrence Kobescak

Lawrence is a mortgage agent with Trillium Mortgage, a real estate investor, finance writer and creator of OntarioMortgageSuperstore.com. OntarioMortgageSuperstore.com has reached over 125,000 Canadians since 2009. OntarioMortgageSuperstore.com assists Ontario residents obtain bad credit mortgage financing, second mortgages and helps all home owners obtain the best mortgage rates. In his free time, Lawrence assists other real estate professionals across Canada by providing real estate search engine optimization services.

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Lawrence Kobescak

Lawrence is a mortgage agent with Trillium Mortgage, a real estate investor, finance writer and creator of OntarioMortgageSuperstore.com. OntarioMortgageSuperstore.com has reached over 125,000 Canadians since 2009. OntarioMortgageSuperstore.com assists Ontario residents obtain bad credit mortgage financing, second mortgages and helps all home owners obtain the best mortgage rates. In his free time, Lawrence assists other real estate professionals across Canada by providing real estate search engine optimization services.

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CBC – The Bank of Canada on Tuesday held its benchmark interest rate steady at one per cent, with the central bank warning that the country’s economy is performing slightly better than expected but will soon change.

It’s the 10th consecutive policy meeting that the central bank has stood pat.”Uncertainty around the global economic outlook has increased,” the bank said in its latest policy decision. “Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened.”

The bank’s target for the overnight rate is the rate at which banks borrow for short-term loans. Many other interest rates in the consumer sphere are correlated to it, so it is the central bank’s best weapon for heating up or cooling down the economy.

Althought the bank has held the benchmark interest rate steady, it also added a cautionary note.

“The weaker external outlook is expected to dampen GDP [gross domestic product] in Canada through financial, confidence and trade channels,” the bank said.

“The economy also continues to face competitiveness challenges, including persistent strength of the Canadian dollar…. Reflecting all of these factors, the bank has decided to maintain the target for the overnight rate at one per cent.”

Bank to monitor global economy

Choosing to hold steady is another signal that the bank remains concerned about the state of the global economy, but not enough to make credit cheaper to obtain than it already is.

“They gave no hints whatsoever that they were possibly thinking of a rate hike or cut in the months ahead…. they are just not going there,” said Doug Porter, deputy chief economist with BMO Capital Markets.

Porter said the bank would need to see a resolution to the European crisis and sustained stronger growth in the U.S. to entertain raising borrowing costs for Canadians.

To cut interest rates further would likely require Canada falling back into recession, he added.

“The bank will continue to monitor carefully economic and financial developments in the Canadian and global economies …and set monetary policy consistent with achieving the two per cent inflation target over the medium term,” the bank said.

Last week, the central bank moved in conjunction with five other influential central banks to ensure that U.S. dollars are available throughout the world by lowering the fees lenders must pay to access them.

In its statement, the bank said the economy has performed better than anticipated in the latter half of 2011. Statistics Canada data recently found that the economy is expanding at a 3.5 per cent annual pace, ahead of the bank’s projection. And while most private-sector economists expect that to slow to about 1.5 per cent moving forward, that’s still well ahead of the Bank of Canada’s 0.8 per cent expectation.

The central bank raised its target for the overnight lending rate to its current level from 0.75 per cent in September 2010.

The bank meets every six weeks to decide on its interest rate policy. Its governors are next scheduled to meet on Jan 17.

Lawrence Kobescak

Lawrence is a mortgage agent with Trillium Mortgage, a real estate investor, finance writer and creator of OntarioMortgageSuperstore.com. OntarioMortgageSuperstore.com has reached over 125,000 Canadians since 2009. OntarioMortgageSuperstore.com assists Ontario residents obtain bad credit mortgage financing, second mortgages and helps all home owners obtain the best mortgage rates. In his free time, Lawrence assists other real estate professionals across Canada by providing real estate search engine optimization services.

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